The Coronavirus Startup Survival Guide / Your Contracts And Coronavirus

Your Contracts And Coronavirus

COVID-19 is having an unprecedented impact on the global economy and for most of us, excluding a small number of industries, we are having to take each day as it comes.

Whether you are an entrepreneur or an investor, you will be considering how best to protect your business and how to navigate your relationships with contracting parties in light of the Government’s social distancing requirements.

The issue is that in order to carry out many contracts, social interaction is necessary. The bigger issue therefore is whether your inability (or the other contracting party’s inability) to perform the contract will leave either of you in breach of contract and/or whether it may be best for you to terminate the contract in order to keep any losses to a minimum.

Whilst under English law there may be a number of ways to terminate a contract, in this short note we take a quick look at ‘force majeure’ and how you may use it.

What is force majeure? ‘Force majeure’ translates from French as "major force". Such major force (see below examples) if specifically identified in your contract, may excuse you from the performance of your contractual obligations.

Which events are covered? Usually, a force majeure clause will cover events such as war, terrorism, earthquakes, hurricanes, acts of government, plagues or epidemics etc.

Is COVID-19 covered? This will depend on the drafting of your contract. Use of the term ‘epidemic’ or ‘pandemic’ will cover COVID-19 but not all contracts use these exact words. Instead, you may see reference to ‘acts of government’. An act of government will have occurred where a government body has imposed travel restrictions or quarantines (which indeed the Government has done as a result of COVID-19).

How does this affect my obligations? In addition to identifying force majeure events, the force majeure clause should also specify the impact that the event must have on your obligations for the clause to be triggered. Your clause may refer to your obligations being ‘prevented’, ‘delayed’ or ‘hindered’ for example. Clearly ‘prevented’ sets a much higher bar than ‘hindered’. Consider the facts carefully as they will differ in each case.

How do I rely on this clause? The force majeure clause may provide that notice be given to the other party. If that is the case, you should follow the notice provisions to a T; do not deviate.

What is the effect of relying on the force majeure clause? If your contract contains a force majeure clause and the impact of the event is such that it either ‘prevents’, ’delays’ or ’hinders’ the performance of your obligations, it will suspend the performance of your obligations while the effect of the force majeure event (in the case of COVID-19) continues. Some force majeure clauses go one step further and permit the affected counter-party to terminate the contract by notice; this will mean that the contract is brought to an end.

Practical considerations

We have set out below some practical action points for you to consider:

  1. - Consider which contracts are likely to be affected by COVID-19 and assess their priority in terms of your potential liability for non-performance and ongoing relationships.
  2. - Check for the ‘force majeure’ clause. In light of the above, consider whether COVID-19 is covered and the impact that it must have on your obligations for the clause to be triggered.
  3. - If you can rely on the force majeure clause, do you need to give notice to the other party? How must you give notice in writing? Is email allowed.
  4. - Does the force majeure clause entitle either party to terminate the contract?

Despite the above, it may be the case that your force majeure clause does not cover COVID-19, or, your contract does not contain a force majeure clause at all.

If either of these are the case, there may be other legal avenues open to you which you may want to discuss with a legal professional, however, you should not necessarily overlook communicating directly with the other party and working together with them to find a practical solution to the issues which COVID-19 has thrown up.

Mireille Turner is a corporate lawyer with expertise in domestic and international M&A work and extensive experience in advising clients on day to day corporate matters. Please get in touch with Mirelle if you have any questions.

We’re here to help

If you have any questions or need any advice during this difficult time, feel free to send us an email at admin@angelinvestmentnetwork.co.uk .

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